The U.S. government’s handling of the financial crisis ten years ago was deeply flawed. For instance, research from the People’s Policy Project has showed the systematic destruction of black wealth that ensued from the administration’s prioritization of the interests of the privatized banking industry over the interests of ordinary Americans. Efforts to reinstate the Glass-Steagall separation between commercial and investment banking failed and “too big to fail” never ended. The already weak Dodd-Frank financial reform legislation has been systematically undermined de-legitimized (with the cooperation of many Democrats).
The lessons of 2008 have not resulted in the end of risky financialization, speculation on the housing market, or gigantic banks reliant on broad-ranging guarantees backed up by the federal government. In fact, the opposite is true. Financial institutions learned that they could continue their risky practices with little to fear and everything to gain from the government. For instance, a complex, lightly-regulated ‘shadow banking’ sector accounted for $13.8 trillion in assets in 2015, posing a gigantic contagion risk to other financial institutions and the public.
What seems almost inevitable is that at some point in the relatively near future, there will be another financial crisis. I am convinced that this is true, but even if the timing is not certain, what 2008 demonstrated is that policymakers should be urgently planning for the possibility. A new paper from my colleague Thomas M. Hanna at the Democracy Collaborative argues that the government should respond to this next crisis by taking real ownership stakes in the banks (rather than bailing them out) and investigating long-term public ownership.
Bank Nationalization is Very Common
The recent history of banking nationalization is extensive and global. Since the 1980s, this list has included (but is not limited to) the three largest banks in Norway, the entire Mexican banking system, four of the five largest Israeli banks, two large Swedish banks, the Finnish savings bank group, and the largest bank in Belgium.
The 2007-2008 crisis alone expanded this list to include the entire Icelandic banking industry, the majority of the Irish banking sector, Parex Bank in Latvia, ABN AMRO and ASR in the Netherlands, Banco Portugues de Negócios in Portugal, and Northern Rock, Bradford and Bingley, and RBS in the United Kingdom. The United States was not immune – the country took a 77.9% majority share in the insurance giant AIG, a 73.8% majority share in GMAC, a 36% stake in Citigroup, and nationalizes (and rapidly re-privatizes) failing banks every year through the operations of the FDIC.
The United States has sought to avoid being an active shareholder, instead using complicated mechanisms to ensure that even companies in which it holds a majority ownership stake are not run as public services. The government placed its AIG shares in an irrevocable trust administered by three trustees recruited from the private sector, and provided the trustees with complete power to vote and dispose of its shares. In Citigroup, the government agreed to vote its shares in proportion to all other votes cast except in certain designated matters, notably the election or removal of directors. It never exercised that right, despite various scandals.
The approach was criticised by centre-right Swedish politician Bo Lundgren who argued “for me, that is a problem. If you go in with capital, you should have full voting rights.” Hanna argues that “by going to such extreme lengths to avoid any straightforward nationalization, the U.S. government response… became unnecessarily complicated, devoid of transparency, and replete with backroom deals and perverse incentives”.
Even where countries did exercise their voting rights, however, this was typically a temporary measure. In most countries, banks nationalized during crises are re-privatized after they are returned to health – sometimes giving the government a return on their sizeable investment, but leaving public ownership just as they begin generating substantial profits that could be put to socially useful purposes.
The Crisis Next Time
Hanna suggests an alternative- genuine public ownership rather than bailouts. A lot of recent attention has been paid to publicly-owned banks and their benefits – the century-old Bank of North Dakota has been correctly highlighted as a success story worth emulating, and the Savings Bank Financial Group (an umbrella organization including the Sparkassen municipal savings banks, regional public banks, building societies, public insurance groups, real estate companies, equity investing companies, and municipal advising companies) employs around 321,600 people and has business volume of €2.8 trillion. Large publicly owned banks are also prominent in Argentina, Japan, Brazil and Chile.
The proposal suggests that the U.S. government should use the opportunity of the next financial crisis to take broad sections of the financial industry into permanent public ownership. He quotes Willem Buiter (now chief economist at Citigroup) questioning:
Is the reality… that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses? If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.
The proposal essentially envisions that during the next financial crisis the federal government would nationalize troubled or failing banks – not using complicated trustee systems or waiving their right to vote or by announcing an intention to privatize everything they own as quickly as possible—but with the intention of maintaining a large (yet diversified and decentralized) public banking sector restructured to serve public needs. This would likely necessitate creating a single agency or holding company tasked with managing the rights and responsibilities of ownership. I would suggest that this role could overlap with the public institution exercising voting rights within a social wealth fund.
Different publicly-owned banks could serve different purposes and specializations – Hanna suggests, for instance, banks focussing on renewable energy and green transition projects, a postal bank focussing on basic services for under-banked populations, a bank charged with supporting local bond-financed infrastructure projects (such as social housing) and a bank tasked with financing and assisting conversions of private firms to worker, community and public ownership.
Active public ownership would ensure that institutional resistance to public policies such as splitting commercial and speculative activities, or instituting rules on executive pay and compensation, would be sharply limited. Hanna proposes that banks should be allowed managerial autonomy on a day-to-day basis, but that democratic accountability, efficiency, and transparency, as well as public participation through multi-stakeholder boards and other democratic mechanisms should be enshrined in the new system.
This proposal is welcome, and progressive policymakers would be well-advised to consider and develop it by drawing up plans for ensuring that the next crisis is used to reassert public control over the financial system in this way.